Statement by Reserve Bank Governor Graeme Wheeler: The Reserve Bank today left the Official Cash Rate (OCR) unchanged at 1.75 percent. Global economic growth has become more broad-based in recent quarters. However, inflation and wage outcomes remain subdued across the advanced economies, and challenges remain with on-going surplus capacity. Bond yields are low, credit spreads have narrowed and equity prices are at record levels. Monetary policy is expected to remain stimulatory in the advanced economies, but less so going forward. The trade-weighted exchange rate has increased since the May Statement, partly in response to a weaker US dollar. A lower New Zealand dollar is needed to increase tradables inflation and help deliver more balanced growth. GDP in the March quarter was lower than expected, adding to the softening in growth observed at the end of 2016. Growth is expected to improve going forward, supported by accommodative monetary policy, strong population growth, an elevated terms of trade, and the fiscal stimulus outlined in Budget 2017. House price inflation continues to moderate due to loan-to-value ratio restrictions, affordability constraints, and a tightening in credit conditions. This moderation is expected to persist, although there remains a risk of resurgence in prices given continued strong population growth and resource constraints in the construction sector. Annual CPI inflation eased in the June quarter, but remains within the target range. Headline inflation is likely to decline in coming quarters as the effects of higher fuel and food prices dissipate. The outlook for tradables inflation remains weak. Non-tradables inflation remains moderate but is expected to increase gradually as capacity pressure increases, bringing headline inflation to the midpoint of the target range over the medium term. Longer-term inflation expectations remain well anchored at around 2 percent. Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly. More information:· Read the Monetary Policy Statement· Watch the Monetary Policy Statement press conference live-stream at NZT 10am
| A RBNZ release || August 10, 2017 |||
The Reserve Bank aims to improve the effectiveness of its prudential regulation through a combination of simpler regulations and bolstering its supervisory activities.
Deputy Governor Grant Spencer said in a speech to the Kanga News Capital Markets Conference today that the Bank is considering how it might improve its regulatory framework. Two catalysts in this regard are the recent IMF Financial Sector Assessment Program (FSAP) report, and the Bank’s recently initiated review of bank capital adequacy.
“We must maintain the high international reputation of the New Zealand financial system. Within that, we seek to maintain and build on the Bank’s non-intrusive supervisory approach and simple-yet-conservative prudential requirements.
“Compliance with the international prudential frameworks is not always a black and white choice. The Basel framework sets minimum standards for key prudential requirements, but often offers a menu of choices within those standards, for countries to tailor to their specific circumstances. A small country like New Zealand implicitly has a greater degree of freedom.
“We will continue to place emphasis on getting the right incentives in place for prudent institutional governance, supported by effective market discipline that increasingly makes use of technology advances,” Mr Spencer said.
“We want to simplify the current regulatory regime in a number of areas, but also heed the IMF’s advice about improving the effectiveness of our supervisory model. The IMF has recommended an increase in resourcing to achieve this.
“We believe the supervisory regime could be usefully bolstered through increased use of thematic reviews on topics of broad prudential interest. We are also looking to make greater use of targeted reviews by external experts in cases where serious non-compliance becomes apparent at particular institutions.
“With regard to the current review of bank capital adequacy, we are leaning towards simplifying both the allowable capital instruments and the methods for measuring risk, though we are in the consultative phase and far from making any decisions. We do not believe that New Zealand’s relatively vanilla banking system warrants a high degree of complexity in its capital regime.”
Mr Spencer said that the Bank will also review the minimum capital ratios. New Zealand’s relatively high-risk profile, due to high industry and portfolio concentration, supports a conservative approach relative to international peers.
He added that the Bank is mindful of inefficiencies that can be created if its prudential requirements needlessly or disproportionately add to the cost of financial intermediation, stifle innovation or disadvantage some institutions over others.
“The Bank sees its current Dashboard project as an important step in an on-going effort to support and enhance more effective and efficient disclosure for banks, insurers and other financial institutions.”
The Bank will explore how the macro-prudential framework can be made more robust through a stable and well-signalled policy process. The Bank will also be applying its key principles of simplicity, incentive alignment and conservatism in the upcoming review of the Insurance (Prudential Supervision) Act. More information:· Read the speech: Banking regulation: where to from here?
· Listen to excerpts of the speech on Soundcloud
| A RBNZ release || August 2, 2017 |||
An external central banking expert has commended the Reserve Bank’s forecasting and monetary policy decision-making processes.
As part of good practice peer review, the Bank regularly commissions reviews by external experts of its forecasting and monetary policy decision-making processes. It has modified its processes over the years in light of their findings.
Dr Philip Turner, former Deputy Head of the Monetary and Economic Department and a member of Senior Management of the Bank for International Settlements (BIS), was requested to attend the February 2017 forecasting round, report on his assessment of the process, and make recommendations where relevant.
This issue of the Bulletin presents Dr Turner’s report back to the Bank.
Dr Turner comments that, in seeking to “avoid unnecessary instability in output, interest rates and the exchange rate”, the Bank’s mandate is realistic about what monetary policy can achieve.
“This mandate would not have been fulfilled in recent years, given the large shocks to international prices, by trying to keep the year-on-year inflation rate in New Zealand at close to 2 percent. To have achieved this, interest rates would have had to move by more than they have in recent years, and this would have created the unnecessary instability in output and the exchange rate that the RBNZ is enjoined to avoid.”
Dr Turner says it was clear that the Bank’s Monetary Policy Committee, which advises the Governing Committee on the monetary policy decision, has in its sights key questions about what might be called the ‘new normal’ for monetary policy.
These include the lower natural or neutral rate of interest; the increased responsiveness of aggregate demand to any change in interest rates; and how macro-prudential policies will affect monetary policy.
He says that the Bank’s open working-level culture of challenging views or arguments in a constructive and professional way enables the Bank to avoid ‘policy blind spots’.
“The whole forecast round has been engineered to bring to bear a full range of economic analyses and to ensure an open and comprehensive debate.”
Dr Turner recommended further work on two topics.
“Both are on the radar screens of RBNZ economists. The first is what the changing labour market under heavy immigration means for non-tradable inflation. The second is what the ‘new normal’ for monetary policy after years of very low interest rates means for future monetary policy. The impact of interest rate increases on the financial industry and on the real economy may be quite different than in the past.”
Dr Turner concludes: “Results over the past few years speak for themselves. The RBNZ has helped steer its economy through several large external shocks. Because it has done so without becoming trapped at a zero policy rate and without multiplying the size of its balance sheet by buying domestic assets, it has retained more room to pursue, if needed, a more expansionary monetary policy than is available at present to many central banks of other advanced economies.” More informationBulletin: Reflections on the Reserve Bank of New Zealand’s Monetary Policy Round
| A RBNZ release || July 28, 2017 |||
Understanding key trends in the economy is crucial for the Reserve Bank, even though the trends can only be estimated and never directly observed and measured.
Assistant Governor and Head of Economics Dr John McDermott said today that three trends were particularly important: the neutral interest rate; potential output growth; and the equilibrium real exchange rate.
“These trends are the anchors around which we aim to stabilise the economy, and thereby inflation over the medium term,” Dr McDermott said in a speech. “While these trends are unobservable and the Reserve Bank has no control over them, they’re important to pin down so that monetary policy can be set appropriately.”
These unobservable factors are often denoted in economic models with a star (or asterisk). So, metaphorically, one might say it is necessary to estimate the position of the economy’s stars in order to navigate monetary policy appropriately.
“Core inflation is another important unobservable concept, because by filtering out temporary factors it provides a better guide to future medium-term inflation,” he said.
Dr McDermott’s speech provided an update on how the Reserve Bank thinks about the trends in the New Zealand economy and the changes in the trends over time. Currently, the neutral interest rate is estimated to be around 3½ percent; potential output growth is 2.9 percent; and core inflation is 1.4 percent.
The neutral interest rate has been slowly falling for some time. In part, this reflects developments in potential output growth – the sustainable growth rate of the economy. Despite a boost from strong net immigration in recent years, growth in potential output has remained much lower than in the past two expansions due to nearly no contribution from productivity growth.
More information:Looking at the Stars speech
The Reserve Bank has released a Bulletin article reviewing the outcomes of the International Monetary Fund’s (IMF) latest Financial Sector Assessment Programme (FSAP) for New Zealand. An FSAP is a comprehensive review of a country’s financial system against international standards, with a particular focus on the quality of financial sector regulation. The Bulletin article explains the considerable amount of preparatory work that the Reserve Bank and other New Zealand agencies undertook to support the IMF’s two missions to New Zealand in 2016. The results of the IMF’s assessment were released in early May 2017. They included more than 100 recommendations, many of them directed at the Reserve Bank given its broad range of financial system responsibilities. The Reserve Bank is actively considering the recommendations in its areas of responsibility and the extent to which these would support the Reserve Bank's statutory purpose of promoting and maintaining a sound and efficient financial system. Many of the specific FSAP recommendations dovetail with on-going policy and supervisory initiatives. Examples include the bank director attestation review, the review of registered bank capital requirements, legislative reform for the financial markets infrastructure regime, the review of the Insurance (Prudential Supervision) Act, and the five-year anniversary review of the macro-prudential policy framework in 2018. More information· Bulletin - Outcomes of the 2016 New Zealand Financial Sector Assessment Programme· Financial Sector Assessment Programme· IMF Financial System Stability Assessment (PDF 1.6MB)
| ARBNZ release || July 20, 2017 |||
Firms in the finance sector, regulators, and other authorities all have a part to play in managing cyber security risks while still benefiting from the opportunities of new financial technology. “The dynamic cyber environment means organisations have to be nimble in their approach to cyber security - focused on outcomes, rather than prescriptive compliance exercises,” Reserve Bank Head of Prudential Supervision, Toby Fiennes, said in a speech delivered today to the Future of Financial Services conference, in Auckland. He said that cyber-attack poses a significant threat to the global financial system, as shown by the ‘WannaCry’ ransom-ware attack that affected more than 200,000 systems around the world and the more recent ‘Notpetya’ attack. “The nature and incidence of cyber risk is unique, meaning that typical approaches to risk management and disaster recovery planning may not be appropriate. While cyber vulnerabilities can be mitigated, the potential sources of cyber threats and the attack footprint are just too broad, so they can never be eliminated,” Mr Fiennes said. The Reserve Bank had thought about whether to introduce more prescriptive requirements but decided not to at this stage. “We doubt that prescriptive regulations would appreciably improve the outcome, when the technology and threat landscape are both changing so rapidly. We will, however, review this policy stance from time-to-time to ensure that it remains appropriate,” Mr Fiennes said. “The Reserve Bank is closely watching the emerging wave of ‘digital disruption’ affecting the financial sector as firms react to customer demand for a more online experience. In the short term, digital disruption may result in new risks and increased instability in the financial system but in the long term, digital disruption of the banking sector may improve the efficiency of the financial system. The long-term impact on financial system soundness is less clear. “We’re working with other agencies, such as the FMA and Ministry of Business, Innovation and Employment, to ensure that New Zealand presents an environment where digital financial innovation can flourish, provided it is done safely. In our view, New Zealand’s financial market regulatory settings support innovation and industry-based solutions and we see no need to actively steer potential solutions from industry by providing a concessionary environment for new entrants. “As the prudential regulator, we’re looking at whether financial institutions appear to be taking cyber risks sufficiently seriously. We look to self-discipline and market discipline to provide the defences, agility and crisis preparedness that are required,” Mr Fiennes said. More information· Speech: The Reserve Bank, cyber security and the regulatory framework· Audio: listen to excerpts of the speech on Soundcloud
| A RBNZ release || July 19, 2017 |||
A large improvement in New Zealand’s net foreign liabilities as a share of GDP since 2009 makes the economy less vulnerable to shocks, Deputy Governor Geoff Bascand said in a speech today. “New Zealand’s net foreign liabilities – what we owe to the rest of the world, broadly speaking – reached nearly 85 percent of GDP at the start of 2009 but now they are down to 58.5 percent of GDP, their lowest level since the late-1980s,” Mr Bascand said. “New Zealand has become less reliant on offshore funding over the past decade, and the maturity of bank borrowing has lengthened, reducing the risks from a potential funding shock,” he said. The liquidity policy introduced by the Reserve Bank in 2010 has contributed to this improvement. The decline in New Zealand’s net foreign liabilities (NFL) partly reflects low global interest rates that have reduced the interest payments on our overseas debt, and high equity prices that have boosted the value of our overseas assets. More significantly, a better balance between national saving and investment during the current economic expansion has helped contain the current account deficit and lowered the ratio of net foreign liabilities to GDP. “Although some of the macroeconomic factors that have driven the improvement in our NFL position are potentially more transient or fortuitous than others, the higher domestic saving and financing of investment augurs well for the durability of the current growth phase.” However, Mr Bascand warned that New Zealand’s net foreign liabilities as a share of GDP is still relatively high internationally, especially given our exposure to commodity exports that can be subject to large price swings. “Significant uncertainty remains regarding household behaviour and the contribution of the sector to New Zealand’s saving-investment gap, and the extent that banks as intermediaries might increase their reliance on offshore funding. “Borrowing from the rest of the world isn’t automatically ‘bad’. It can be a good thing if it leads to productive investment that enhances our economic performance and leads to high per-capita incomes over time, but debt-fuelled consumption is less sustainable. “Much of the investment undertaken by the household sector is in the form of new house builds and renovations to existing homes. If housing demands cannot be met by increased household sector or domestic saving more broadly, it will be reflected in a deterioration in our NFL position.” Mr Bascand said that banks have recently begun to compete more aggressively for deposits and tighten lending standards, which should help alleviate offshore funding pressures and prevent a significant increase in NFL. “Relying on non-residents to fund investment makes the financial system vulnerable to changes in the availability or cost of that funding. That vulnerability may be exposed in times of acute financial stress, with financial institutions’ access to funding cut off or available only at much higher interest rates. “As always, the Bank will be monitoring these developments closely. We welcome the improvement in New Zealand’s net foreign liabilities since the GFC, but do not see it is a reason to become complacent,” Mr Bascand said. More information:· Speech: New Zealand’s net foreign liabilities: What lies beneath, and ahead?· Audio: listen to the excerpts of the speech on Soundcloud
| A RBNZ release || July 17, 2017 |||
The Reserve Bank has developed a short video to help the public identify the ‘real deal’ Brighter Money banknote. The video explores the banknote’s sophisticated security features, showing the public how to identify a genuine banknote by the ‘look, feel and tilt’ sensory approach used by other central banks to identify a counterfeit. “Being able to identify a real New Zealand Series 7 Brighter Money banknote is important to maintaining New Zealand’s low counterfeit rate,” says Reserve Bank Head of Currency, Property and Security Steve Gordon. "New Zealand has a low counterfeit rate by international standards and the Bank wants to keep it that way. One of the ways we can do this is by ensuring the public know how to identify the security features on our banknotes. Use the video’s three prompts - look, feel and tilt, to make sure your banknotes are the genuine article.” In addition to the new video, the notes and coins pages of the banknotes have been updated to make them easier to read, navigate and find information. The video is available in English and Te Reo Māori. More information
| A RBNZ release || July 12, 2017 |||
Today signals 50 years of decimal currency in New Zealand and the Bank is marking the anniversary with a new display in its Museum and Education Centre.
This coincides with a new Bulletin article titled “A litmus test for society: Reserve Bank decimal note designs 1967-2017” which traverses New Zealand’s currency as it showcases national and cultural identity. It is accompanied by a downloadable timeline poster showing all seven series of Reserve Bank notes released since 1934.
Reserve Bank Governor Graeme Wheeler said “This milestone is a great opportunity to reflect on a point in time and see how our banking has evolved and how our money has changed over the years.
“Despite the growth in electronic payment systems, cash in circulation continues to grow and I expect cash, as a means of exchange, to be around for a long time yet. However, we do need to understand more about what drives our use of cash and this is the theme of some research the Bank will soon undertake.”
Highlights of the Museum and Education Centre display include:
• a screen display of the original television and radio advertisements and jingle featuring ‘Mr Dollar’, the character created to bring the decimal currency into New Zealand households • footage of the first distribution of currency to the banks prior to launch day • education and publicity material including a Dollar Scholar certificate and quiz • early coin designs • artist’s preliminary layout for the $100 banknote • the story of the Bahamas Mule, a minting error of the 2 cent coin.
“Reading through the material and watching the footage you get an understanding of how different our operations were run back then,” said Mr Wheeler.
The Museum and Education Centre is open to the public from Monday to Friday 9.30am – 4.00pm.
More information • Bulletin article: “A litmus test for society: Reserve Bank decimal note designs 1967-2017” • Mr Dollar video • Currency timeline poster
| A RBNZ release || Monday 10 July 2017 |||
The Reserve Bank's commitment to price and financial stability in an uncertain global environment is underlined in the Bank's Statement of Intent (SOI) for 2017-2020.
The Reserve Bank supports economic growth by targeting price stability, promoting a sound and efficient financial system, and meeting the public's currency needs.
The SOI, signed off on 16 June, outlines the nature of the Bank’s work programme over the next three years. The Bank’s nine strategic priorities are framed around three themes: enhancing the Bank’s policy frameworks; continuing to strengthen the Bank’s internal and external engagement; and improving infrastructure and reducing enterprise risk.
"The outlook for New Zealand’s economic growth remains positive, albeit with considerable uncertainty remaining, especially internationally,” Governor Graeme Wheeler said.
"We are working to deepen the Bank’s understanding of the evolving conditions affecting the New Zealand economy and their implications for monetary policy.”
The New Zealand financial system remains sound and continues to perform its functions effectively. The International Monetary Fund’s Financial Sector Assessment Programme (FSAP) review has provided useful input for the on-going development of the Reserve Bank’s prudential regime.
“We will review key elements of the prudential policy framework to better meet the Bank’s soundness and efficiency objective,” Mr Wheeler said.
The Bank will also review the macro-prudential policy framework in line with the five-year requirement set out in the Memorandum of Understanding between the Bank and the Minister of Finance.
“Throughout, the Bank will maintain a high level of engagement with its stakeholders and communicate widely on its policies, their rationale and impacts. The Bank will monitor the effectiveness of engagement through an External Stakeholder Engagement survey in 2018.”
As well as working to complete the implementation of replacements for the Exchange Settlement Account System (ESAS) and the securities settlement and depository system (NZ Clear) – both enhancements to the payments system – the Bank will also be implementing the roadmap for best-practice management of its balance sheet and finances.
The SOI outlines other key projects, including improving the resilience of the Bank’s operations and developing a plan for the future custody and distribution of currency.
"We continually seek to strengthen our performance and we believe these strategic priorities position the Bank well to face the challenges ahead,” Mr Wheeler said.
More information:Read the Statement of Intent for 2017-2020
| A RBNZ release || June 28, 2017 |||
Palace of the Alhambra, Spain
By: Charles Nathaniel Worsley (1862-1923)
From the collection of Sir Heaton Rhodes
Oil on canvas - 118cm x 162cm
Valued $12,000 - $18,000
Offers invited over $9,000
Contact: Henry Newrick – (+64 ) 27 471 2242
Mount Egmont with Lake
By: John Philemon Backhouse (1845-1908)
Oil on Sea Shell - 13cm x 14cm
Valued $2,000-$3,000
Offers invited over $1,500
Contact: Henry Newrick – (+64 ) 27 471 2242